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Markets continue to dither

Lesley Beath  |  23 May 2016Text size  Decrease  Increase  |  

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To the extent that any content below constitutes advice, it is general advice (or, in New Zealand, a "class service") that has been prepared by Lesley Beath as a Morningstar authorized representative (ARN 469614) without taking into account your particular investment objectives, financial situation or needs. If necessary, you should consider the advice in light of these matters, consult with a licensed financial advisor, and consider the relevant Product Disclosure Statement (Australian products) or Investment Statement (New Zealand products) before making any decision to invest. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does have an interest in the securities disclosed in this report.


Global equity markets continue to dither, with little conviction apparent.

The US market remains under the influence of a medium-term sell signal but that signal has had little effect on price as yet. I noted last week that the situation appeared to be deteriorating, as rallies up to the 200DMA in the US S&P Banks Index, the Dow Transports and the Russell 2000 began to falter.

I still think the situation argues for caution, but I am conscious that no major support levels have been significantly breached at this stage.

This lethargy in the market comes at a time when bullish sentiment is low. In the latest AAII (American Association of Individual Investors) Sentiment Survey, optimism for a short-term rise in stock prices was "below 20 per cent for just the 30th time in the 29-year history of the survey".

It was "the 28th consecutive week and the 61st out of the past 63 weeks that bullish sentiment has been below its historical average of 39.0 per cent".

Individual investors thus have little enthusiasm--from a contrarian viewpoint this is positive.

The difficult thing about a market that is in "no man's land" is that we are desperately waiting for a resolution--but as we are all aware, a watched pot never boils.

We can only continue to watch and wait, noting short-term risks as they arise.

The MSCI World Index has drifted lower over the past month and is now testing the combined support of the 2015 downtrend and the 200DMA. That can be viewed as a normal occurrence. But if we look at the weekly chart we see the rally from the February low took the index back up to test the underside of the 2011 uptrend.

This "pullback" as it is referred to is common after a break of trend. So we have the MSCI World Index also in the situation where it is fighting for direction. At this stage risk still appears to be skewed to the downside.

The UK FTSE, which often gives early signals, is holding above solid support. Let's see what this index does over the next week or so.

In China, the Shanghai Composite was flat on the week. It has drifted lower since mid-April, hugging the 2015 downtrend. It has been a relatively quiet time for this market. That quietness is a bit disturbing--the calm before the storm perhaps?

This sort of trading sometimes precedes a pick-up in volatility so we may get some decisive action soon. We will just have to keep an eye on this market.